Poor diagnosis for instruments

Cook Medical is exactly the sort of company you would expect to be the future of an Australian manufacturing sector increasingly squeezed by the mining boom and a high Australian dollar. The firm employs 420 in Brisbane where it manufactures and exports more than $120 million worth of sophisticated medical instruments used for in vitro fertilisation and cardiovascular surgery.

High in their skills and intellectual property (IP) content, theory tells us they should be able to ride out even today’s currency to be survivors when the dollar returns to more normal levels.

However, according to Asia Pacific director Barry Thomas, an above-parity dollar has thrown a spanner in the works of plans to grow Australian turnover from today’s $310 million to $650 million by 2016.

“You would think that with such high-profit, high-value products we could make things here," Thomas says.

“But parity is too high even for us. We need to see something like an 80-85¢ range to be comfortable."

In a story repeated across the $5 billion-turnover medical and scientific instrument sector, Australian products are more expensive overseas, companies are forced to cut prices and margins and Australian dollar income has shrunk.

Thomas says Chinese labour costs are now 40 per cent below and United States costs 15 per cent below Australia’s.

Cook’s response has been to have some products manufactured in China before air freighting to Brisbane where components are added that cannot be made offshore because of IP concerns.

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The only local products not threatened by the dollar are bespoke cardiac stents which are custom designed and made to fit individual patients at a cost of $15,000 each.

“We can weather this for another year or so at these sort of rates but you can’t go to your head office and argue in favour of a currency at $1.05," Thomas says. “We are just not going to be able to manufacture our off-the-shelf standard products in Australia if we can’t address this."

While Australia’s commodity boom is building wealth, there is concern in industry at what happens when the resources party ends. BIS Shrapnel chief economist Frank Gelber says the Australian economy will continue to be buoyed by mining investment but the price we will pay is a less broadly based and less resilient economy.

“Australia lived quite well without a mining boom," Gelber says. “The difference this time is when the boom ends and prices collapse we may have lost the industries we will need to grow again. You can’t just pick yourself up and start again these things from scratch. They could be lost for good."

Gelber says politicians have watched as manufacturing’s share of gross domestic product halved to less than 10 per cent in the past two decades. Now the issue is survival, with one solution to identify and support key manufacturing nodes needed in the future.

“I don’t think you pump money in to make them survive but you just give them contracts or you work harder to make it cheaper for them to operate," he says.

But professor Roy Green, the dean of business at UTS, Sydney, argues that high-value research and design will ultimately be threatened if basic production activities can not be retained onshore. “Those countries where the production takes place will simply develop their own high-end capabilities and replace us," he says.

Even the strongest local high-technology businesses are responding to the high dollar by downgrading local manufacturing.

Sleep-disorder business
ResMed
reported a 6 per cent drop in earnings because of the dollar in its most recent third-quarterly report.

“Our research and development is still performed in Australia," says ResMed CFO
Brett Sandercock
.

“But today we do 70 per cent of our manufacturing in Australia and 30 per cent in Singapore. Any incremental increase in our volumes will come out of Singapore."

Peter Dawes
, chairman of Melbourne-based SGE Group, is working to protect his factories which employ 450 people making glass and electronic components for chemical analysis equipment.

He is investing $5 million over the next year to boost productivity to the level where he can be competitive with the dollar at around parity.

“A technology business like ours is supposed to be the vision for what Australian manufacturing is going to be with high IP content and high-value manufacturing," Dawes says.

“But if we can’t make it, there are not going to be many industries that will be able to survive. We are a bit of a canary in the coalmine in that respect, I suppose."

SGE’s 50-year history is based on the invention in the 1950s by the CSIRO of atomic absorption spectroscopy, which is the world’s dominant chemical analysis technology. However, there has been little domestic industry created on this scientific excellence, with US-based Agilent Technologies one of few surviving local manufacturers of the instruments.

Dawes says while the NSW government is working with his company to help ensure the survival of his Sydney factory, he lacks similar support for his Melbourne operation.

“The only other governments I have heard from have been from overseas who are targeting high-tech manufacturing operations like mine," Dawes says. “I am very motivated to keep our manufacturing in Australia despite the huge cost base, but I just wish that I didn’t feel so alone."

The federal government has turned its back on the industry plans beloved of the Hawke-Keating government, other than in favoured areas such as automotive. Support focuses on R&D, commercialising research and on start-up businesses. There are industry innovation councils in some areas of industry, but these lack formal plans, financial support or sustained policy attention.

A lack of focus on the medical and scientific instrument industry costs Australia dearly in lost industrial opportunities. While Australian medical scientists publish more than 3 per cent of world scientific papers, the medical devices sector commands only 0.6 per cent of world markets, according to Austrade. Exports were $1.6 billion in 2006.

In this environment companies have little alternative than to accelerate the internationalising of activities formerly performed in Australia. Melbourne-based Invetech, which makes robotic laboratory and biotechnology equipment for sale under the Leica brand, is typical.

“We leverage our San Diego [R&D] facility where we operate projects in collaboration with our Melbourne office," says Invetech managing director Fred Davis. “We also look to use our Shanghai contract manufacturing site for high-volume production in addition to our Melbourne manufacturing site for low-volume, new-to-market products."

Davis says in the past Australian high-tech companies had to strive to be one of the best in the world. Now, to survive, they have to be “the best of the best".

The growth of new small businesses into larger ones is under greatest threat as they do not have the ability to manage operations in a highly sophisticated manner during their formative stages. Richard Walmsley, whose company Ingeneus makes opthalmic and cardiology equipment, says the dollar has fluctuated between 0.55¢ and $1.07 in the short life of his business. He is now faced with complex decisions on currency risk.

“This is pretty hard for a small business," Walmsley says. “We are a bunch of engineers and we are not financiers."

Paul McKay, founder of Taylor Surgical Instruments which makes electrosurgical devices, says his overseas customers are also finding the environment difficult, increasing pressure on the company. One customer in Italy has demanded an extended period to settle their bills. “We agreed," he says. “Now they have asked us to wear fluctuations in the dollar. It is a very real issue for us."

Sydney-based bionic-ear manufacturer
Cochlear
manages the exchange rate by using forward exchange contracts to hedge its cash flow from the Americas and Europe. The company has also been pursuing productivity improvements at its Sydney plant following a move from a collective agreement to individual contracts with staff.

“There are opportunities to boost productivity from redesigning the product for improved manufacturability, through to new manufacturing processes and increased flexibility and agility in production," says CEO Chris Roberts. “If we hadn’t [moved to individual contracts] we would be in trouble given where the Australian dollar is today. It is paramount that our manufacturing is internationally competitive."

Roberts says politicians have introduced more impediments to manufacturing rather than helping it survive. An issue is the scientific and economic illiteracy of an increasing number of politicians.

“Australia is at risk of going below a critical mass of manufacturing activity such that the best and the brightest people in manufacturing want to get out for their own career prospects and new people don’t want to enter," Roberts says.

“There is no confidence in the future of manufacturing in Australia, and that becomes a self-fulfilling prophecy in terms of attracting people to the sector."